Departmental Purchases & Cash Payments in Accounting

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  • 0:03 Recording Departmental…
  • 2:19 Recording Cash Payments
  • 3:25 Discounts
  • 4:58 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

When a business purchases goods and services, it records the purchase from and cash payments to its suppliers. In a departmental system, purchases and cash payments are tracked separately.

Recording Departmental Purchases

Ms. Shue owns Shoes 4 Her, a retail store that sells women's running shoes and boots. She's aware of the amount of purchases she makes for items that are used in the business and products that are purchased and sold to her customers overall, but she needs a method to track these items. Let's examine this process.

Shoes 4 Her needs supplies like office supplies and a phone service. The business also needs the actual shoes that it will sell to its customers. These are two different types of items.

  • Expenses - represent costs that a business incurs in order to generate sales such as office supplies
  • Inventory - represents items that are purchased with the intention of selling them to customers at a higher price than cost (called a mark-up), such as the actual shoes for Shoes 4 Her

A company can pay for its purchases using cash or on account. The phrase on account means that the company has a period of time to pay the amount they owe to the creditor. Businesses usually have 30 to 60 days to pay an outstanding amount before interest is charged on the overdue balance. These amounts are called accounts payable.

The invoice is a source document issued by the creditor and contains the necessary information to record these purchases. Businesses record their purchases on account in the purchases journal, which keeps track of:

  • The date the item was purchased
  • The company from whom the items were purchased
  • The invoice number
  • The amount owed to the supplier (also known as accounts payable)
  • The department that made the purchase

The last step allows management to determine how much each department is purchasing and from which suppliers.

Let's look at how Ms. Shue would record certain purchases on account in the purchases journal.

Date Items & Company Accounts Payable Credit Running Shoes Dep. Boots Dep. Invoice #
May 4 purchased office supplies from Supplies R Us $400 #131
May 13 purchased running shoes to resell from The Sneaker Shoppe $2,000 $2000 #47
May 27 purchased boots to resell from The Stylish Boot Co. $3,000 $3000 #A98
Total $5,400 $2,000 $3000

Note that Ms. Shue can easily identify the total purchases for the running shoe department ($2,000) and the boot department ($3,000) in the purchases journal.

Information from the purchases journal must be transferred to the company's general ledger which is an accumulation of all accounts and amounts relating to the company. This transfer is done using a journal entry.

Recording Cash Payments

Businesses usually pay outstanding amounts using cash or check. A purchase may be paid for right away using cash, or if the purchase was made on account, payment will usually be made by check 30 to 60 days after the item was purchased. Payments made to suppliers are recorded in the cash payments journal which keeps track of:

  • The date the payment was made
  • The account(s) involved
  • The name of the supplier
  • The check number
  • The nature of any discount taken by department
  • The amount of the purchase

Let's say that in the month of May, Shoes 4 Her made the following payments:

  • May 1 - Rent = $15,000 (check #45)
  • May 15 - paid amount owing to Sneaks Co. for a purchase made in April = $1,750 (check #46)
  • May 31 - paid amount owing to Les Boots Store for a purchase made in April = $800 (check #47)

Ms. Shue would enter this information into the cash payments journal.

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